Approximately $376.7 Million of Structured Securities Affected
New York, December 09, 2010 -- Moody's has downgraded seven classes of Notes issued by Concord Real Estate
CDO 2006-1, Ltd. due to the deterioration in the credit
quality of the underlying portfolio as evidenced by an increase in the
weighted average rating factor (WARF), the current level of Defaulted
Securities, and the sensitivity of the transaction to recovery rates.
The rating action is the result of Moody's on-going surveillance
of commercial real estate collateralized debt obligation (CRE CDO) transactions.
Cl. A-1, Downgraded to A1 (sf); previously on
Mar 25, 2009 Confirmed at Aaa (sf)
Cl. A-2, Downgraded to Baa3 (sf); previously
on Mar 25, 2009 Downgraded to Aa2 (sf)
Cl. B, Downgraded to Ba3 (sf); previously on Mar 25,
2009 Downgraded to A1 (sf)
Cl. C, Downgraded to B2 (sf); previously on Mar 25,
2009 Downgraded to A3 (sf)
Cl. D, Downgraded to Caa1 (sf); previously on Mar 25,
2009 Downgraded to Baa3 (sf)
Cl. E, Downgraded to Caa2 (sf); previously on Mar 25,
2009 Downgraded to Ba2 (sf)
Cl. F, Downgraded to Caa3 (sf); previously on Mar 25,
2009 Downgraded to B1 (sf)
Concord Real Estate CDO 2006-1, Ltd. is a revolving
cash CRE CDO transaction backed by a portfolio of whole loans (12.2%
of the pool balance), commercial mortgage backed securities (CMBS)
(22.1%), CRE CDO debt (2.1%),
B-note debt (33.0%), mezzanine debt (24.0%),
and Rake bonds (6.6%). As of the November 19,
2010 Trustee report, the aggregate Note balance of the transaction,
including Preferred Shares, is $465 million, the same
as at issuance.
On January 13, 2010, Moody's received "Notice
of Request for Cancellation of Notes" from the Trustee, indicating
the cancellation of portions of the junior Notes in Concord Real Estate
CDO 2006-1, Ltd., consisting of 52% of
Class C Notes, 30% of Class D Notes, 23% of
Class E Notes, 8% of Class F Notes and 100% of Class
G Notes, collectively the "Subject Notes". On
May 14, 2010, the Delaware Court of Chancery ruled that the
Subject Notes were validly delivered for cancellation and were no longer
Outstanding as of January 5, 2010. The decision was appealed
by the Trustee on June 11, 2010. Per Moody's special comment,
"Junior CDO Note Cancellations Should Concern Senior Noteholders in Structured
Transactions", dated June 14, 2010, there is a concern
that the cancellation of junior notes can lead to a diversion of cash
flow away from the senior notes. During the current review of Concord
Real Estate CDO 2006-1, Ltd., holding all key
parameters static, the partial cancellations of the Subject Notes
results in slightly higher expected losses and longer weighted average
lives on the senior Notes, while having the opposite effect on mezzanine
and junior Notes. However, this does not cause, in
and of itself, a downgrade or upgrade of any classes of Notes.
There are six assets with par balance of $66.3 million (15.4%
of the current collateral pool balance) that are classified as Defaulted
Securities as of the November 19, 2010 Trustee report. Moody's
expects meaningful losses from those Defaulted Securities to occur once
they are realized.
Moody's has identified the following parameters as key indicators of the
expected loss within CRE CDO transactions: WARF, weighted
average life (WAL), weighted average recovery rate (WARR),
and Moody's asset correlation (MAC). These parameters are typically
modeled as actual parameters for static deals and as covenants for managed
WARF is a primary measure of the credit quality of a CRE CDO pool.
We have completed updated credit estimates for the non-Moody's
rated collateral. For non-CUSIP collateral, Moody's
is eliminating the additional default probability stress applied to corporate
debt in CDOROM® v2.6 as we expect the underlying non-CUSIP
collateral to experience lower default rates and higher recovery compared
to corporate debt due to the nature of the secured real estate collateral.
The bottom-dollar WARF is a measure of the default probability
within a collateral pool. Moody's modeled a bottom-dollar
WARF of 5,818 (including Defaulted Securities) compared to 3,490
at last review. The distribution of current ratings and credit
estimates is as follows: Aaa-Aa3 (0.9% compared
to 2.1% at last review), A1-A3 (4.1%
compared to 0.0% at last review), Baa1-Baa3
(5.2% compared to 4.4% at last review),
Ba1-Ba3 (2.4% compared to 35.3% at
last review), B1-B3 (15.9% compared to 37.2%
at last review), and Caa1-C (71.5% compared
to 21.0% at last review).
WAL acts to adjust the probability of default of the collateral in the
pool for time. Moody's modeled to a WAL of 4.1 years compared
to 8.3 years at last review. We are modeling the WAL,
including remaining revolving period, in the current review.
WARR is the par-weighted average of the mean recovery values for
the collateral assets in the pool. Moody's modeled a fixed
WARR of 15.1% (excluding Defaulted Securities) compared
to 18.0% at last review.
MAC is a single factor that describes the pair-wise asset correlation
to the default distribution among the instruments within the collateral
pool (i.e. the measure of diversity). For non-CUSIP
collateral, Moody's is reducing the maximum over concentration stress
applied to correlation factors due to the diversity of tenants,
property types, and geographic locations inherent in the pooled
transactions. Moody's modeled a MAC of 11.4%
compared to 15.0% at last review.
The principal methodologies used in these ratings were "CMBS: Moody's
Approach to Revolving Facilities in CDOs Backed by Commercial Real Estate
Interests" published in July 2004, and "Moody's Approach to
Rating SF CDOs" published in November 2010.
Moody's review incorporated CDOROM® v2.6, one of Moody's
CDO rating models, which was released on May 27, 2010.
The cash flow model, CDOEdge® v3.2, was used to
analyze the cash flow waterfall and its effect on the capital structure
of the deal.
Changes in any one or combination of the key parameters may have rating
implications on certain classes of rated notes. However,
in many instances, a change in key parameter assumptions in certain
stress scenarios may be offset by a change in one or more of the other
key parameters. Rated notes are particularly sensitive to changes
in recovery rate assumptions. Holding all other key parameters
static, changing the recovery rate assumption down from 15.1%
to 5.4% or up to 25.0% would result in average
rating movement on the rated tranches of 0 to 5 notches downward or 0
to 3 notches upward, respectively.
The performance expectations for a given variable indicate Moody's forward-looking
view of the likely range of performance over the medium term. From
time to time, Moody's may, if warranted, change these
expectations. Performance that falls outside the given range may
indicate that the collateral's credit quality is stronger or weaker than
Moody's had anticipated when the related securities ratings were issued.
Even so, a deviation from the expected range will not necessarily
result in a rating action nor does performance within expectations preclude
such actions. The decision to take (or not take) a rating action
is dependent on an assessment of a range of factors including, but
not exclusively, the performance metrics. Primary sources
of assumption uncertainty are the current stressed macroeconomic environment
and continuing weakness in the commercial real estate and lending markets.
Moody's currently views the commercial real estate market as stressed
with further performance declines expected in a majority of property sectors.
The availability of debt capital is improving with terms returning towards
market norms. Job growth and housing price stability will be necessary
precursors to commercial real estate recovery. Overall, Moody's
central global scenario remains "hook-shaped" for 2010
and 2011; we expect overall a sluggish recovery in most of the world's
largest economies, returning to trend growth rate with elevated
fiscal deficits and persistent unemployment levels.
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
related to the monitoring of this transaction in the past six months.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Structured Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Downgrades Seven CRE CDO Classes of Concord RE CDO 2006-1
250 Greenwich Street
New York, NY 10007